Unpredictable coronavirus is a nightmare for the markets
The initial relaxed, almost insouciant, reaction to the likely economic impact of coronavirus is long gone. The epidemic has been raging in China for some two months, but only this week have its implications for the world economy started to scare global business and finance. What has changed, and what happens next?
The main change is the dawning realisation of how difficult the virus’s economic impact is to predict. Until recently, many believed that, based on the Sars outbreak of 2003, one could say with reasonable confidence that, if the current outbreak knocked 1 percentage point off Chinese growth this year, it would slow global growth by 0.2 per cent – and so on. Yet it’s becoming increasingly clear that these sorts of calculations no longer work, and for a number of reasons.
First, global supply chains are so complicated that a shutdown of a plant in China has a knock-on impact across the world; Jaguar Land Rover has reportedly been bringing back parts from China in suitcases in order to keep production going in Britain. I don’t think people realised quite how vulnerable these supply chains were when they set them up. They certainly do now. Second, a handful of coronavirus cases have destroyed regional economies in a seemingly random way. Northern Italy is particularly seriously affected, with events canceled and air travel sharply down. You cannot put a number on the impact, because you cannot foresee where the disease will next occur.
Third, fears of the virus spreading affect even those economies which are so far beyond its apparent reach. A good, if troubling, example of that was the cancellation of a mobile phone conference in Barcelona. We cannot know whether, had the event gone ahead, there would have been any problems. But many delegates had pulled out, and we do know is that if a big annual event is cancelled, that business is lost forever. For local industry, it was a catastrophe.
Global supply chains are so complicated that a shutdown of a plant in China has a knock-on impact across the world
That leads to the feature that has suddenly scared the markets. It is the difference between risk and uncertainty. Markets like to identify risk because they understand it and can profit from it – the “known unknowns” Donald Rumsfeld, then US defense secretary, described back in 2002. They are deeply troubled, however, by what he termed “unknown unknowns” – and coronavirus has become just that.
If you accept that we cannot know how serious coronavirus will be, then we can begin to sketch how things might turn out. Maybe something like this:
We can be pretty sure that the epidemic (or maybe pandemic) will be past its peak by the autumn. We can be pretty sure that good personal hygiene and medical practice will help to contain it. But we also know there will be a huge one-off blow to the world economy, one that might push several major economies into technical recession. How bad a recession we cannot know, but unlikely to anything nearly as serious as 2008. It is possible that, for other reasons, 2021 will be difficult, but by 2022 this will all be a memory, if for too many people a painful one.
Yet whatever happens, questions will remain about the complexity of the world economy – should we ship (or fly) so much stuff about? Should the holiday trade be so dependent on travel? – and the general health of the planet – surely we can do better? And that, perhaps, is the most positive point to make: how to do better. We will all learn from this – maybe to become a little less arrogant about humankind’s ability to manage everything. Until we do, it is back to the basics of public health.